October 29, 2009
There was a catch phrase back in the 1990s with the word "not" that you may recall. Someone would make a declarative statement, pause for a beat, and then negate the statement by saying "not." We saw it on Saturday Night Live and in the movie Wayne’s World. “That's a really sweet tie ... Not.” Well, I want to pause here for a minute and say what this meeting is not.
The Commission is not acting today. There will be no vote on the wheat contract. I say this because many of us recall that the last time there was a public meeting of a subcommittee of our Agricultural Advisory Committee, it resulted in market moves. In light of that, I want to be clear that we are only listening to information—advice if you will—from one of our advisory committees and from a subcommittee of an advisory committee. That is the sum total of what this meeting is about. Advisory committees are very helpful, but they don't make regulatory policy. If someone suggests otherwise, simply say to them, "Not."
As to the substance, I applaud the CME Group for attempting to devise a viable solution. Not everyone agrees with all of the particulars, but that's okay. That's part of the debate.
Here is the lay of the land today. CME has a proposed rule pending before the Commission. When a rule of this nature is submitted, the CFTC has 45 days in which to act. This means we have until November 13th. At this time, unless the CFTC affirmatively finds that the proposal violates the Commodity Exchange Act (CEA) or regulations, we are bound by that law to approve it. If we take no action, a decision by default if you will, the CME proposal is approved.
It is, by the way, theoretically possible for CME to withdraw their proposal and re-issue it, for example, to be implemented not in September, but earlier, perhaps in May or June of 2010.
I commend the efforts of all to address convergence; however, it’s our responsibility as regulators to look a bit further out the horizon. I look at the three-year Commitment of Traders (COT) report that the Commission published last week, and I see that there is very large percentage of “massive passives” in the wheat market, especially with respect to the other types of traders. These large, price insensitive traders, I’m concerned, may have the potential to create uneconomic market effects; which is particularly troubling to me with regard to other markets that may have small open interest and/or reduced liquidity. So, while the CME may have a proposed “fix” for the wheat market for now, I think that we also should consider a more global resolution.
Secondly, on cotton; a year and a half ago I asked the then-Acting Chairman to open an investigation related to the run-up and volatility in the cotton market in late February and early March 2008. I can tell folks that our enforcement staff has done a thorough job on that investigation. Earlier this month, 11 United States Senators, including the Chair and Ranking Member of the Senate Agriculture Committee, wrote about this matter. They are concerned with the integrity of the futures market and with the ability of cotton farmers and others to continue to use this critical risk management tool. Specifically, they asked that the CFTC disclose to the public all factors reviewed in the investigation that may have relevance. Doing so, they hope, will assist in restoring greater confidence among market participants. I could not agree more with them, and I am hopeful that we will soon release as detailed a report to the public. I think in this instance we should provide more information and that we should do so in as time-sensitive a fashion as possible.
I’d say that I want to make several other points, but then I’d have to pause and say, “Not!”
Thank you Mr. Chairman, I look forward to hearing from the Advisory Committee.
Last Updated: June 10, 2010